Week in Review: Markets Pause as Fiscal Risks Resurface

The Moody’s downgrade stripped the U.S. of its last triple-A rating, citing a lack of progress in curbing deficits and rising interest costs. While not unexpected, it reignited focus on the growing fiscal burden, especially with legislation on the table that could add nearly $3 trillion to the deficit over the next decade. The bill extends Trump-era tax cuts and proposes new breaks, with most spending cuts only coming later. Bond markets reacted sharply - the 10-year yield rose above 4.5%, and the 30-year briefly topped 5%, levels not seen since 2007. With recession risks easing and fiscal stimulus likely on the way, rate-cut expectations have been scaled back, and fixed income markets globally are adjusting. Meanwhile, U.S. business activity picked up in May, with both services and manufacturing beating expectations, though housing data was mixed and rising costs tied to tariffs remain a concern.

Markets took a breather last week after a strong rally, with the S&P 500 pulling back following nearly a 20% rise since April. Investor sentiment cooled as bond yields climbed and renewed trade tensions re-entered the picture. While most headlines focused on President Trump’s tariff threats against the EU and tech imports, several other developments caught the market’s attention. These included a credit rating downgrade of U.S. debt by Moody’s, a weak auction for 20-year Treasuries, and the House passing a major tax package dubbed the “One Big Beautiful Bill.” The bill cleared a major hurdle in the House but still needs to navigate the Senate, where it’s likely to be reshaped.

Market Moves of the Week

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The yield on 30-year U.S. Treasury bonds has risen above 5%, signalling investor anxiety over the country’s worsening fiscal position. Moody’s downgrade of the U.S. sovereign rating last week added to concerns around rising debt and political inaction. As doubts grow over the sustainability of U.S. borrowing, the dollar has come under pressure - falling nearly 1% this week and over 7% year-to-date, its worst annual start since 2005. Source: Bloomberg Credits: Strategic IQ